What to Do After Receiving Notice of Bankruptcy
Upon receiving a notice of bankruptcy, there are a few things a creditor should do in order to ensure that they can receive at least some of the money that is owed them by the debtor who has filed for bankruptcy.
The first thing a creditor should do is cease all collection actions. This might include phone calls, mailings, bills, and lawsuits. A debtor who files bankruptcy is legally entitled to an automatic stay of collection actions for a set period of time. Failure to do this could compromise a creditor’s ability to recover.
In bankruptcy, any available, disposable assets that the debtor has will go to pay off as much of his or her debts as possible. Secured debts (debts with collateral attached) are usually easier to collect, since they are treated as a higher priority, and there is a piece of property (a car or a house, usually) which the creditor can collect to secure the debt.
If a creditor is owed a relatively small amount, and the debt is unsecured, it will probably be a very low priority for repayment. This means that the creditor will not be able to get a piece of the debtor’s available assets until all higher priority debts have been satisfied. As a practical matter, this means that the creditor is unlikely to recover much, if any, of what it is owed. The amount of money a creditor can reasonably expect depends on the type of debt (secured or unsecured), the debt’s priority, the number of creditors in line to collect first, and the total size of the debtor’s disposable assets.
Hiring a bankruptcy attorney is a good idea, as he or she will be able to advise the creditor on the status of the debt, and what the creditor is likely to recover. If the debt is very low priority, and for a small amount, it is probably not worth the time and expense to file a claim with the bankruptcy court. If the debt is non-dischargeable, however, priority is irrelevant. This is a debt that survives bankruptcy, and includes student loans, fines and civil damages resulting from a drunken driving accident, and child/spousal support.
If a bankruptcy attorney advises a creditor that the debt is worth pursuing, a claim should be filed with the court immediately. The deadlines for these filings are short, and are rigidly enforced. Next, the creditor should consider attending the first meeting of creditors (also known as a “341” meeting, after the relevant Bankruptcy code section). These allow creditors to obtain some information about the debtor. However, some lawyers claim that there is usually little practical benefit to attending these meetings, and it is better to exercise the right to take the debtor’s deposition.
If the debtor engages in misconduct during the proceedings, there is a chance that the bankruptcy will be dismissed, without any entry of judgment. This puts the debtor and creditors in the same legal position they occupied before bankruptcy was filed.
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Last Modified: 05-20-2009 04:55 PM PDT
